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January 1, 2013 4:08 pm
Past performance is no guarantee of future returns, but when it comes to predictions it seems a fair place to start.
The equity strategists called the FTSE 100 relatively well last year, forecasting a gain of about 8 per cent on average for the year against an actual advance of 5.8 per cent.
This year they have predicted an advance of nearly 9 per cent: a survey of seven leading banks reveals a 2013 average target of 6,428 against a starting point of 5,897.81.
Goldman Sachs was among last year’s most accurate forecasters with a 2012 FTSE target of 5,800, while the wooden spoon went to Morgan Stanley for its 5,000 prediction.
For 2013, both brokers have put the same 6,500 target on the index.
Morgan Stanley strategist Graham Secker notes the FTSE’s underperformance against European indices last year. A bias towards commodity producers in the index meant UK corporate earnings fell more sharply than in continental Europe, with the sharpest contraction in profit margins in a decade, he says.
So, though world growth is expected to flatline in 2013, margins would seem to have troughed and earnings growth should follow, he says.
Goldman also forecasts a recovery in UK earnings, outpacing subdued global growth, even though we may have to wait until 2015 for a modest pick-up in activity in the euro area. The stabilisation in corporate profits should help drive a switch into equities from bonds, where risk premiums are too low, says strategist Peter Oppenheimer.
“We believe that the macro and profit growth drivers do not need to be particularly strong from here for investors to get a reasonable return,” he says. “If the equity market is adequately discounting future growth, we should expect to see a return in line with the cost of equity.”
Hopes of a switch into stocks led Credit Suisse to be the most bullish among the big brokers on the FTSE 100 this year, with a 6,600 year-end target.
“Equities are our favoured asset class for 2013,” says CS strategist Richard Kersley. “While the acceleration of growth will be modest, the expansion of developed market central bank balance sheets is likely to accelerate . . . As a consequence, we believe that while headline inflation will be muted, inflation expectations will rise, which should benefit equities relative to bonds.”
Others were more guarded given the strength of last year’s rally. While JPMorgan Cazenove has a 6,100 FTSE target for 2013, it has advised clients to remain cautious through the first half.
“[The] consensus expects further multiple expansion, but we fear that this was largely a 2012 story,” says JPMorgan strategist Mislav Matejka. “The price of safety is not as high any more, a lot of supportive policy newsflow is behind us, and growth is likely to remain subtrend.”
One of the surprises of 2012 was the outperformance of smaller companies. The FTSE 250 notched up a 22 per cent annual gain while the FTSE Small Cap advanced 24 per cent.
This re-rating came even as earnings expectations fell: Citigroup counted 17 consecutive months in which earnings forecasts were down more than 5 per cent.
“The performance of all UK indices through 2012 appears to have been driven by valuation expansion and not by upward revisions in earnings,” says Espirito Santo. “The implication is that confidence in outlooks has improved, but earnings forecasts remain unchanged or have worsened. Continued share price outperformance will increasingly require an improvement in medium-term earnings forecasts.”
Last year’s biggest gainers were companies in recovery or paying down debt, such as pubs group Enterprise Inns (up 266 per cent), Dixons Retail (up 189 per cent) and set-top box maker Pace (up 123 per cent). Analysts expect deleveraging and self-help to play well again this year.
Citi analyst Hugo Mills says: “Given the tough macro [environment], stocks which are taking steps to consolidate markets, cut costs or boost productivity, or seeing wider supply-side tightening arguably start with a big advantage.”
His self-help recommendations for 2013 include Ashtead, the equipment rental group, and packaging maker DS Smith. Panmure Gordon, meanwhile, suggests troubled platinum producer Lonmin as a potential recovery play.
UBS also advises stock picking over sector investment, highlighting the drugmaker AstraZeneca as a turnround story for 2013.
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